Home Insurance Coverage - Replacement Cost

One of the more common and misunderstood coverages on a home insurance policy is the Dwelling Coverage - also referred to as Coverage A on an insurance declarations page.  This coverage is the cost to completely rebuild your home on the same location, the same square footage, with the same quality of construction at today's costs.  If any or all of the home is destroyed by a covered loss - this coverage would come into play for the dwelling.  It is not tied to the market value of the home and in many cases depending on where you live, you could have a replacement cost that is much higher than the purchase price of the home or in affluent areas - the opposite.

We often hear the consumer say - my brother could rebuild that home for less, my contractor could do it for a portion of that etc.  This may be true in pure building costs.  What people are not told is that your replacement cost includes other fees such as debris removal and architectural fees among others.  Obviously if your home burns to the ground, there is a cost to remove the debris and clean up the area.

The other most common area of concern with the Dwelling Coverage is whether or not the coverage is capped (Actual Cash Value) or if the home has some sort of extension of coverage.  An example would be a home insured at $100,000 -- some insurance companies will insure up to that amount and no further.  Most companies will add anywhere from a 25% to 200% extension or cap.  So the house burns down and the person has a 50% extension - they would have $150,000 of coverage on the home.  Then there is the best form of coverage called Guaranteed Replacement Cost which means the home will be rebuilt no matter what the cost of building as long as the home is insured at replacement cost (amount required to rebuild it today).  This coverage has been stripped away from many companies policies --- many of the large national companies have gone to the caps.  If insured properly, there should not be an issue - but if you can go with a higher extension such as 50% or get the full guaranteed replacement - you'll be better off.

When the major hurricanes hit Louisiana and Florida, the cost of building materials went up considerably - here in the Northeast!  So let's just assume your house burned down at that time and you had $200,000 of coverage with a 25% cap.  You would get paid a maximum amount of $250,000.  If your home was 1300 sq. ft. and it normally would cost $200 a square foot to rebuild -- but because of unforeseen increases in building materials it was now going to be $250 a square foot.  The insurance company would rebuild the home costing a total of $325,000.  That's a $75,000 shortage to you even with your 25% cap that brought you up to $250,000.  You pay the difference.  Make sure your clients have the right amount of coverage!

The goal of course is not to ever over-insure.  The goal is to keep the home at the proper limits with safety measures in place to offset any inflationary events.  I can tell you that many of the people who come to me for home insurance have never had this explained to them and most likely are under insured.  For most people their home is their biggest asset -- make sure it's covered that way.